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Happy New Year, Now Pay Your (Higher) Taxes

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The recent “Fiscal Cliff” deal left Americans facing a higher tax bill in 2013. However, there are also taxes that were a part of Obamacare that are piling on top. Here is a succinct summary of the 13 federal tax hikes that are now in place for 2013 courtesy of The Foundry blog:

Of course, these higher taxes not only means less money for Americans to spend, but also less money for businesses to invest and hire new workers.

Raising the top marginal tax rate on high-income taxpayers is particularly destructive because most small businesses, such as sole-proprietorships, partnerships, LLCs, and S-corporations, file through the individual income tax code. According to data from the IRS, in 2009, nearly half (45.2 percent) of all taxpayers earning more than $200,000 in Maine had partnership or S-corporation income (for more information, see my study “Who are Maine’s ‘Rich'”).

So what does the academic literature say about the empirical relationship between taxes and economic growth? While there are a variety of methods and data sources, the results consistently point to significant negative effects of taxes on economic growth even after controlling for various other factors such as government spending, business cycle conditions, and monetary policy. In this review of the literature, I find twenty-six such studies going back to 1983, and all but three of those studies, and every study in the last fifteen years, find a negative effect of taxes on growth. Of those studies that distinguish between types of taxes, corporate income taxes are found to be most harmful, followed by personal income taxes, consumption taxes and property taxes . . .

In any case, the lesson from the studies conducted is that long-term economic growth is to a significant degree a function of tax policy. Our current economic doldrums are the result of many factors, but having the highest corporate rate in the industrialized world does not help. Nor does the prospect of higher taxes on shareholders and workers. If we intend to spur investment, we should lower taxes on the earnings of capital. If we intend to increase employment, we should lower taxes on workers and the businesses that hire them.

Another big reason, perhaps as important as the climate, was tax. Oregon is one of only five states with no sales tax. “You replace a server every three years and a server costs a lot, so sales tax is a big deal,” says Mr Park. Electricity can be cheaper elsewhere, but Mr Park reckons that “the power rate is easier to change than the tax law.” In Washington state, which also has a cluster of data centres (Microsoft, among others, is at Quincy), legislators have been willing to make deals with inward investors, but in Oregon there is no need for special arrangements.

So Facebook, which is not considered a bastion of conservative thought, places their data centers where it is cold and there is no sales tax. Well, at least Maine is competitive in one arena.

Along the same lines, a report by the Mackinac Center for Public Policy in Michigan shows that high cigarette taxes have fueled “rampant tobacco smuggling” across the country. In fact, Mackinac found that New Hampshire was the highest ranking “export” state: for every 100 packs of cigarettes consumed in N.H., almost 27 packs were smuggled out. I wonder how many of those cigarettes found their way to Maine?

Taxes matter. Thankfully, as Matt Gagnon points out, Governor LePage’s tax cuts to the personal income tax will partially offset President Obama’s tax hikes. Now if we can just get Maine’s tax rate to zero . . .